Why the US Housing Bubble Pain is likely to continue until at least 2014

Even though AA toxic assets are now selling at 65 cents on the dollar compared to 35 cents a year ago, the number of foreclosures in the pipeline in USA matters to the world financial system, because that’s what determines at what point banks can say they are solvent, without everyone bursting out laughing. 

By way of explanation, a Bank Repossession (REO) is the final stage of the foreclosure process, that’s the point at which the bank throws you out of your house onto the street. In USA typically three foreclosure notices are required before you end up on the street so when the media reports “X” foreclosure filings in a month, that’s a mix of the 1^st, 2^nd and 3^rd (final) stages, which can be a bit confusing.

You might have thought that in the circumstances, the facts surrounding the “de-housing” of millions of Americans would be something of at least peripheral interest to the elected officials of the US Government? Evidently it’s not; try asking your Congressman how many families got thrown out on the street in his “patch” since the start of the housing bust, he will probably say “that’s classified”, which is another way of saying he couldn’t be bothered to count.

The best source of information in the public domain is RealtyTrac who collect and collate information on filings which happen at a local level. They are a research company so you pay for the information which is not public-domain (so you can’t publish it), although they do release snippets of information that are drip-fed out to the media to promote their services, which appears to be mainly selling houses in foreclosure. Another good source is Mark Hanson Realty, which used to put out very good (free) data, but you have to pay for that now, too. This analysis is based on collating that (public) information.

Add those numbers up, from here and there, and it looks like since the start of 2005 to the end of 2010, three million seven-hundred thousand American families have been kicked out onto the street. At an average of 2.3 people per household that’s 8.5 million Americans who have been directly, physically, affected by the popping of the US Housing Bubble, so far.

That’s about how many civilians were displaced, as in “de-housed” by the US campaigns in Iraq and Afghanistan, although no one bothered to count them either. 

I estimate that by the time the “dust” settles on they myriad of personal tragedies that resulted directly from the misguided policies of the Clinton and more importantly the Bush era, to “promote” (i.e. subsidize) home ownership, six million American families will have been “de-housed” , that’s 14 million personal tragedies.

The last time I looked at that was in September 2009 using data up to June 2009. At that point, after taking into account the dynamics of the foreclosure process it was possible to make a rough-and-ready forecast of the direction. Back then the backlog was obvious, in 2007 it took an average of 151 days from the 1^st notice until the occupants were kicked out, in 2010 it took an average of 400 days, based on that plus some other variables, back then I estimated “best-case” the cumulative would be in the order of six million. One and a half years later, and given that the government has pulled out all the stops to “help”, the dynamic is pretty much in line with the “best-case” forecast, although I reckon the total by end 2016 might reach 6.5 million. 

The good news is that it looks like America has passed the half-way mark of that sad process, the bad news is that it looks like it will take at least until 2014 and perhaps a few years after that, for all of the “mal-investments”  that were made, particularly in 2006 and 2007 to get “washed-clean”.

That projection is pretty much in line with the thesis that house prices in USA, currently in “overshoot” mode, will not return to their “fundamental” until 2016 or so. Which means that for anyone with money, now is a great time to buy, and for anyone who held on this long, it’s probably worth holding on “just” a few more years (“years” remember, not months).